Ask a seasoned trader what it is like to bet against a program trade and he will probably trot out the old saw about standing in front of a bus. Ask him what it would be like to go against an expiration move and he will shake his head and walk away from you. Nobody's ever proved that stupidity isn't contagious -- why take chances?
This is by way of explaining how important an arbitrary level -- 10,000 -- on a 30-stock average has become. Today we saw one of those expiration moves, one of those rallies that can come in the last hour of trading on the day before the quarterly expiration of options and futures. And
10,000 stopped it in its tracks.
The seeds of the rally were in Chicago, where rumors a major firm was buying
futures contracts began making the rounds a little after 3 p.m. EST. People who were short those futures and options rushed to cover, often buying stock, which propelled the
momentarily above 10,000. The rumored buyers:
Morgan Stanley Dean Witter
One trader in the S&P futures pit said that Morgan Stanley was the big buyer at the end of trading, snapping up at least 1,200 futures contracts during the last 15 to 20 minutes of trading. "After the buy-program kicked in, Morgan Stanley and Merrill started some heavy buying," the trader said, adding that each bought several hundred contracts.
"It was tight. We were short the calls but they went out worthless," said one hedge fund manager who specializes in index options trading. Another trader on a major New York desk described the last half-hour's action as "very thin. It was rumors of buying that got things moving. There were a lot of rumors."
To the trading computers in super-cooled rooms in places like Greenwich, Conn., when futures start getting bid higher, stocks start looking relatively cheap. Program buys take stocks up. But even people whose business it is to know the dynamics of the relationship between the stock and futures market were scratching their heads over the late-day action.
"We don't have a
gosh darn clue," said Ted Aronson of
, a highly quantitative Philadelphia trading shop, of today's action. "I have been doing this for 25 years and a lot of my employees are not far behind. We are as high-tech as you can get. But this is one of the most perpetually interesting and confounding markets we have seen."
In the last 10 minutes of trade, the Dow hit the milestone, fell, came back, fell, came back.
"I felt like I was watching one of those
games that comes down to the wire," said Dan Mathisson, head stock trader at
D.E. Shaw Securities
. "We were rooting for overtime here."
The bell rang and it was sitting at 10,001. Traders cheered.
New York Stock Exchange
head Richard Grasso threw hats onto the floor. And then, as closing orders came in, the market fell back. The traders stopped cheering. Grasso quit with the hats.
Even without rumors, it is likely there would have been a pop in the last half-hour of trading as expiration-related positioning began. The S&P 500 options expire at Friday's open and traders often buy or sell stock in anticipation of that move.
"It was a slow grind up all day," said Phil Sylvester, an S&P 100 options trader in Chicago. "I thought if the Dow was below 10,000, there would be sellers at the close, but they didn't materialize."
Few in the index-options crowd were caught short by the swift ascent of the Dow in the closing minutes. "For options traders, the market's given us a chance to adjust," he says. "People had their chance to cover. There's no excuse." As for Friday, "all the ingredients are in place for a crazy day," he said.
Most traders expect to see the market push through the 10K level tomorrow morning, but beyond that, the only thing they're willing to bet on is that it's going to be one of the more interesting triple expirations we've seen in a while.
Place on ground. Light fuse. Get away.